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Saturday, December 13, 2014

Economics is a Fraud – Part One

If you want proof that the "science" of economics is simply an exercise of mass propaganda, read on.

Once upon a time, there was something called "institutional economics." This approach analyzed the economy through the interactions of various institutions in society - corporations, the government, labor unions, the financial industry and so forth. They looked at how corporations, the government and banks actually worked in the real world and incorporated economic history into their analyses. They weren't adverse to using mathematical tools, of course, you can't analyze money flows without them after all, but it was a supplement to the actual study of how economics operated in the daily lives of actual people and institutions. After all, what is economics but a set of social relations between actual human beings?

Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour...Institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions (e.g. individuals, firms, states, social norms). The earlier tradition continues today as a leading heterodox approach to economics

Let's use an example using trade. An institutional economist might look at Wal-Mart using its monopsony power (one buyer, many sellers) to force down prices. She might talk to actual factory owners who shut down their factory in North Carolina and moved it to the Pearl River Delta about why they did it. She might talk to union leaders. She might cruise down the main avenue of the town looking at the boarded up storefronts, potholed streets, empty weedlots and boarded-up houses. She might interview the employees who have worked at the factory their whole life and now have fast food and government jobs as their only other options. She might talk to government officials about how they deal with the loss of revenue and what options they have in a globalized system. She might even fly to China and talk with workers in their cinderblock dormitories who have just moved to the city from a pig farm and now work sixteen-hour days six days a week. What conclusions might be drawn from this approach?

By contrast, the "real" economist never even has to leave his tree-lined suburban neighborhood or ivy-leafed university office. He will not have to talk to all those dirty, unwashed people. He will instead argue from first principles that free trade is always good for everyone. He will spin a tale about Ricardian Equivalence developed by David Ricardo (b. 1772) about English wool and Portuguese wine, and show you any number of complex graphs and charts based on crunching copious amounts of government data. He will never visit a town devastated by free trade, or talk to a worker or factory owner. If you disagree, he will question your intelligence, accuse you of arguing from emotion rather than "science," and not understanding human nature and how the world actually works. He will also assure you that "free trade" has been proven by centuries to be just a necessary part of the human condition that cannot be stopped anyway, so it is futile to argue against it. For this, he will be invited to write columns for the likes of Bloomberg, Forbes and Businessweek, will have prestigious professorships teaching the next generation of economists, be published in the top journals, and appear as a talking head on the television whenever matters of the "economy" crop up.

Many economists of the past were primarily institutional economists. I think the preeminent practitioner of this in the Progressive Era was Thorstein Veblen, whose work has completely disappeared down the memory hole except for his concept of “conspicuous consumption.” The most preeminent of the post-Depression era was probably John Kenneth Galbraith, whose books should be required reading even today. Both of these economists explained the functioning of how the economy actually operated in plain English and wrote bestselling popular books. But their conclusions were insufficiently enthusiastic about the capitalist system in America, and thus they were scrubbed from the record. For example, Veblen contrasted the needs of business to increase money and profits with that of production of goods for actual use, and argued that businesses wanted to actually curtail production to keep profits high. Galbraith, in addition to writing a book about the Great Depression which skewered the underlying greed and fear, had the temerity to suggest that we had solved the production problem and that big business had to artificially create demand for their products through the use of incessant advertising so that goods would not build up on shelves unsold as they had during the Great Depression. For this, and for their lack of mathematical equations, both of these men were scrubbed from economics discourse (despite the bestselling books and the fact that their conclusions were never disproven).

Institutional economics was driven out of the discipline and replaced with abstract theory and fiendishly complex math which viewed the economy as a complex, well-ordered and finely-tuned machine subject to mathematical laws as precise and rigorous as those of quantum physics. For example, rather than explain economic growth by the development of various technologies, or the discovery of fossil fuels, and so on, it was now described thusly:

Got it?

These abstruse mathematical equations allowed practitioners of economics to not only claim that they were the only “real” social science because they used math, but also scrub the discipline of actual people and institutions, political decisions, class conflict, power relations, debt, wars and natural resources, and the resultant messiness, all of which are assumed away. Institutions, politics and social relations are all eliminated in favor of rational markets heading towards equilibrium delivering ideal social outcomes, if only government can get out of the way and not interfere with these “natural” laws. The actual history of capitalism as explained in my previous post was now gone. The economist who derived the above equation (Robert Solow) won every prize he could be given by the establishment, including the John Bates Clark Medal and Bank of Sweden Prize (usually incorrectly referred to as the “Nobel Prize in Economics”).

I began thinking about this when citing the work of Michael Perelman in my previous post. Perelman has written a large number of books debunking the various myths that are deployed to justify our current economic order. For this, he is cast out of the mainstream. I read this about him on Wikipedia:

Perelman writes that he was drawn away from the "framework of conventional economics," noticing that the agricultural system was "consuming ten times more energy than it was producing in the form of edible food." Perelman's research into how "profit-oriented agricultural system created hunger, pollution, serious public health consequences, and environmental disruption, while throwing millions of people off the land" led to his first book, Farming for Profit in a Hungry World (1977). Perelman continued to write extensively in criticism of conventional or mainstream economics, including in all his books (and especially his books published from 2000 to date), papers and interviews.

For daring to question economic orthodoxy and actually write about its shortcomings and limitations of the economy instead of rationalizing it, Perelman has been “exiled to Chico State, a redneck college in rural California, for his lack of freemarket friendliness,” according to journalist Mark Ames, who has himself been exiled from the mainstream media (it’s even the name of his news magazine). As Perelman has said in an interview about reaction to his work "...They hardly notice me.” Yes, every field has a way of enforcing conformity and disciplining heretics, and the “science” of economics is no exception. Notice that there is no actual engagement with Perelman’s criticisms, no refutation of his conclusions, just silence. Skeptical views are suppressed and ignored in the media.

In fact, there are a whole suite of economists who are put out to pasture for making even the slightest criticism of the free market system. Or, they raise inconvenient questions about "conventional" economics described by the mainstream Neoclassical/Neoliberal schools of economic thought. Here are a few whom you may have heard of in addition to Perelman, Veblen and Galbraith:

E.F. Schumacher – questioned the one-size-fits all technology of developing counties as well as the underlying “bigger is better” value system of economics. Author of “Small Is Beautiful.”

Ha-Joon Chang - questions whether "free trade" policies are good for economies. Author of “Twenty-three Things They Don’t Tell You About Capitalism.”

Even conventional capitalist economists like Hyman Minsky were sidelined for being too critical and insufficiently enthusiastic about the free-market system. Minsky had the temerity to write a book arguing that “stability is destabilizing” and that cycles of speculative bubbles were standard features of a freewheeling capitalist economy, rather than exceptions which could be controlled and avoided (which should be obvious from history). For this “crime” his books were soundly ignored and he was put out to pasture at Washington University in St. Louis, where he died in 1996. His book, of course, was 100% accurate in predicting the latest financial crisis. You might think this would validate him, but, as Wikipedia states:

Minsky's theories have enjoyed some popularity, but have had little influence in mainstream economics or in central bank policy.

Minsky stated his theories verbally, and did not build mathematical models based on them. Consequently, his theories have not been incorporated into mainstream economic models, which do not include private debt as a factor. The post-Keynesian economist Steve Keen has recently developed models of endogenous economic crises based on Minsky's theories, but they are currently at the research stage and do not enjoy widespread use.

Instead we get “Freakonimics” which has spawned an entire cottage industry – books, sequels to books, a podcast, even its own movie! Is it any coincidence it is written by a University of Chicago economist and promotes a pro-Market, anti-government, Neoliberal World view? (laissez-faire, we just need to get the right ‘incentives’, etc.) Books written by flacks funded by think-tanks like the Cato Institute or the Heritage foundation that sing hosannas to the free market are on the shelves of libraries and bookstores all over the world.

And then there is the whole behavioral economics school, which
incorporates psychology and studies the actual behavior of real human
beings (imagine that!), Behavioral economics has uncovered all sorts of
irrational behavior, and has won some grudging recognition (one of its
founders, Daniel Kahneman, won an economics “Nobel”), yet it has not
been incorporated in economic analysis, probably because it undermines
the whole mathematically-based approach which views people in the
economy as undifferentiated lumps of rationality and productivity to be
plugged into various equations as need be.

And then there are explicitly Marxist economists like David Harvey, Andrew Kliman, and Richard Wolff, who are totally banished to the margins for engaging in the “forbidden” economics based on the works of Karl Marx. Even Thomas Piketty, with his best-selling book critical of inequality, has to preface every interview about his book with the boilerplate denunciations of Marxism and praise of the free market to get even a skeptical hearing. It’s almost like the self-denunciations we saw under Communism (Capitalism is the greatest system ever invented, but…).

It’s not just economists - philosophers such as John McMurtry and John Gray have been skeptical of conventional economics as well. McMurtry considers the unregulated free market to be destructive of human social values, and describes freewheeling finacialized global capitalism as a ‘cancer.’ Gray, has written, "Capitalism has lurched into a crisis from which it still has not recovered. Yet the worn-out ideology of free markets sets the framework within which our current generation of leaders continues to think and act." Public intellectuals like Slavoj Zizek and David Graeber who are critical of economics are banished to the margins. Instead we get Paul Krugman and David Brooks holding forth from the pages of the New York Times.

Even relatively mainstream capitalist schools like Cartalism (aka Modern Monetary Theory) cannot get a hearing, despite the fact that their conclusions have not been invalidated, they are just politically inconvenient to the ruling class (government is not ‘revenue constrained’ – the money it spends into the economy comes back to it in the form of taxes so long as there are real resources to be utilized; government debt is the private sector surplus and vice-versa)

And then there were economic historians like the late Karl Polanyi and Eric Hobsbawm. Polanyi, for example, argued that:

Contrary to libertarian economists from Adam Smith to Hayek, Polanyi argued, there was nothing “natural” about the free market. Primitive economies were built on social obligations. Modern commercial society depended on “deliberate State action” by and for elites. “Laissez-faire” he writes, savoring the oxymoron, “was planned.”

Libertarian economists, who treat the market as universal—disengaged from local cultures and historic time—are fanatics whose ideas end in tragedy. Their prescription means “no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system.”

"Impotence therefore faces both those who believe in what amounts to a pure, stateless, market capitalism, a sort of international bourgeois anarchism, and those who believe in a planned socialism uncontaminated by private profit-seeking. Both are bankrupt. The future, like the present and the past, belongs to mixed economies in which public and private are braided together in one way or another. But how? That is the problem for everybody today, but especially for people on the left."

And finally there are natural scientists who've taken a look at economics and come up with flaws. Historically, the greatest of these was Frederick Soddy, an actual Nobel Prize winner in the sciences who studied economics because he was alarmed at how economic ideas were leading to military and political conflicts like World War One. Soddy’s work was crucial to understanding radioactivity and nuclear reactions, and he felt that the economic problem needed to be dealt with, or else the increasing destructiveness of applied science would become more of an existential threat to the human race rather than a boon. Soddy observed that while money and debt can expand indefinitely, the real economy was under no such imperative and is subject to the laws of thermodynamics. Furthermore, our system of money is based on debt, and hence a claim on unrealized future resources leading to perpetual instability. Scientist Charles A.S. Hall, a self-described “fish biologist” incorporates biological principles from ecology (following H.T. Odum) to arrive at the energetic basis of the economy through the concept of energy return on energy invested (EROEI). He has written a book called "Energy and the Wealth of Nations," which explains the role energy plays in the economy. This is resolutely ignored by economists, who consider our wealth to be exclusively a product of "innovation" (which can conveniently be neither quantified nor exhausted).

I didn’t even get to alternative economic thinkers like Henry George, Robert Owen and Clifford H. Douglas. And we haven't even touched on anarchist-leaning thinkers like Peter Kropotkin and Pierre-Joseph Proudhon. Or socialist thinkers like Charles Fourier and Étienne Cabet. The list is almost endless!

Gone! All gone! Banished from economic debate in favor of a narrow slice of specialists justifying the current flavor of expansionist corporate globalized capitalism based on debt and infinite growth who claim, without irony, they are practicing a “science” Can anyone believe that all of the above thinkers are somehow invalid?

Despite what Margaret thatcher said, there is an alternative. It's the primary job of the economics priesthood to make sure that we don't know it.

4 comments:

Economics is a justification for the current status quo. Try applying free market principles to the Native Americans before the settlers or notions of private land ownership to the Australian Aborigines. Where they less free because they didn't have these things? Is private property (and the police force required to protect it- at least for those better off) a requirement of libertarianism? I have recently seen some articles attacking the "sharing" economy. People want access, not ownership. Well, why not? If you belong to a country club, isn't that what you want too?